This chapter focuses on how to measure the economic performance through various macroeconomic indicators and objectives relevant to the South African context.
Explain the five main macroeconomic objectives.
Define Gross Domestic Product (GDP).
Differentiate between nominal GDP and other national accounting concepts.
Measure employment and unemployment rates.
Measure the Consumer Price Index (CPI).
Understand South Africa's balance of payments.
Explain measures of income inequality in South Africa.
Economic Growth
Increase in capacity to produce goods/services over time.
Visualized by an outward shift of the Production Possibilities Curve (PPC).
Essential for improving living standards and employment opportunities.
Full Employment
Full use of all factors of production, especially labor.
Unemployment is defined as individuals actively seeking work but unable to find it.
Low unemployment is a policy objective.
Price Stability
Keeping inflation rates low is essential.
High inflation indicates economic inefficiency and instability.
Inflation signifies a continuous rise in prices.
Balance of Payments (BOP) Stability
Record of a country's economic transactions with the rest of the world.
Important for understanding the national economic health and influence of foreign trade.
Equitable Distribution of Income
Fair distribution of income across society.
South Africa faces significant income inequality, with a wide gap between rich and poor.
Economic activity is primarily measured through GDP, which represents the total value of goods/services produced over a specific period (usually annually).
Nominal GDP vs. Real GDP
Nominal GDP: Calculated using current prices.
Real GDP: Adjusted for inflation using prices from a base year.
Production Method (Value Added)
Calculates GDP based on each stage of production's value addition.
Prevents double counting by focusing on final goods.
Expenditure Method
Counts the total spent on final goods/services.
Formula: GDP = C (Consumption) + I (Investment) + G (Government Spending) + (X - Z) (Net Exports).
Income Method
Adds all incomes earned by factors of production (wages, rents, interest, profits).
This method reflects the income generated within the economy during production.
Measures changes in price levels of a basket of consumer goods and services.
Important for tracking inflation and understanding purchasing power changes in households.
Formula: CPI = (Cost of basket in current year / Cost of basket in base year) x 100.
Summarizes the transactions of a country with the rest of the world, including current and financial accounts.
Current Account: Records exports and imports of goods/services and primary income.
Financial Account: Records transactions in assets and liabilities.
A balanced BOP is crucial for economic stability.
Lorenz Curve
Graphical representation of income distribution within a population.
Shows the proportion of total income earned by various segments of the population.
Gini Coefficient
A statistical measure of income inequality ranging from 0 (perfect equality) to 1 (perfect inequality).
Gini index is the Gini coefficient multiplied by 100.
Quantile Ratio
Compares the income of the top percentage of earners to that of the bottom percentage.
Higher ratios indicate greater levels of inequality.
GDP can be expressed at market prices, basic prices, or factor cost. Each has a specific method of calculation and reflects different aspects of the economy's performance.
Market prices include taxes and subsidies, basic prices exclude them, while factor cost focuses on the expenses incurred in production without taxes.
Understanding these concepts is crucial for evaluating economic performance and the overall health of the South African economy, which can inform policy decisions and economic strategies.